Comments on: Short-termism at Royal Dutch Shell http://royaldutchshellplc.com/2010/04/24/short-termism-at-royal-dutch-shell-2/ News and information on Royal Dutch Shell Plc. Wed, 08 Feb 2012 11:12:30 +0000 hourly 1 http://wordpress.org/?v=3.0.3 By: Wilt Staph http://royaldutchshellplc.com/2010/04/24/short-termism-at-royal-dutch-shell-2/comment-page-1/#comment-221551 Wilt Staph Mon, 26 Apr 2010 07:52:59 +0000 http://royaldutchshellplc.com/?p=29275#comment-221551 Thanks for this Jo Blow - some very helpful additions to my original post. I am an enthusiast for the hiving off of Shell's global marketing business into a separate Shell-branded company. I'm a tad ambivalent about whether there would be merit in including the refineries in this or not. If not then maybe Shell could create a third company to run refineries? If others (independents) can do this profitably (they obviously can) then why not create a "Shell Refining Inc." ? Thanks for this Jo Blow – some very helpful additions to my original post. I am an enthusiast for the hiving off of Shell’s global marketing business into a separate Shell-branded company. I’m a tad ambivalent about whether there would be merit in including the refineries in this or not. If not then maybe Shell could create a third company to run refineries? If others (independents) can do this profitably (they obviously can) then why not create a “Shell Refining Inc.” ?

]]> By: Jo Blow http://royaldutchshellplc.com/2010/04/24/short-termism-at-royal-dutch-shell-2/comment-page-1/#comment-221503 Jo Blow Sun, 25 Apr 2010 12:35:35 +0000 http://royaldutchshellplc.com/?p=29275#comment-221503 Well written article Wilt. I thought perhaps that I would expand further in hopes of further helping folks understand where the modern refinery shakes out in the big picture. The modern refinery as Wilt points out is caught somewhat in the middle of a complex situation. At times the refinery functions as a profit center, at others a cost center. This fluctuation is driven by the pace with which the spread between raw crude prices and finished product prices rise and fall, and is further influenced by the given refinery complexity and efficiency along with grade of crude oil it is able to refine. There are many more variables at play, but the above mentioned represent the largest and most important. I will illustrate in simple math below. 42 gallon barrel of oil @ 80$ a barrel = $1.90 per gallon of raw crude processed. Assuming a refinery capability of 95% conversion to value product. this translates to roughly 40 gallons of product to be sold. Assuming that the average cost of all product streams to the consumer is around $2.75 per gallon for ease of illustration. So as you see with these assumptions you basically have a spread of $30.00 a barrel processed. Now you have to take out your cost to process, the marketers cut on the finished product side, the retailers cut, any transportation costs etc. Under this assumption that leaves somewhere around a net gain of $8-$12 bucks in the refiners pocket depending on the variables mentioned above. Now, without a refinery, there is no need to drill for nor produce oil! Oil in its virgin state has no value, the value is derived from the products that can be produced from the raw material. It is for this reason that a total exodus from downstream is short sighted. Shell should be focused on reducing costs, and maximizing yields to position itself to benefit from margin rich environments, and minimize loss during margin poor environments. This would be the appropriate long term approach in the downstream business. Regards, Jo Blow Well written article Wilt. I thought perhaps that I would expand further in hopes of further helping folks understand where the modern refinery shakes out in the big picture.

The modern refinery as Wilt points out is caught somewhat in the middle of a complex situation. At times the refinery functions as a profit center, at others a cost center. This fluctuation is driven by the pace with which the spread between raw crude prices and finished product prices rise and fall, and is further influenced by the given refinery complexity and efficiency along with grade of crude oil it is able to refine. There are many more variables at play, but the above mentioned represent the largest and most important. I will illustrate in simple math below.

42 gallon barrel of oil @ 80$ a barrel = $1.90 per gallon of raw crude processed.

Assuming a refinery capability of 95% conversion to value product. this translates to roughly 40 gallons of product to be sold. Assuming that the average cost of all product streams to the consumer is around $2.75 per gallon for ease of illustration.

So as you see with these assumptions you basically have a spread of $30.00 a barrel processed. Now you have to take out your cost to process, the marketers cut on the finished product side, the retailers cut, any transportation costs etc. Under this assumption that leaves somewhere around a net gain of $8-$12 bucks in the refiners pocket depending on the variables mentioned above.

Now, without a refinery, there is no need to drill for nor produce oil! Oil in its virgin state has no value, the value is derived from the products that can be produced from the raw material. It is for this reason that a total exodus from downstream is short sighted. Shell should be focused on reducing costs, and maximizing yields to position itself to benefit from margin rich environments, and minimize loss during margin poor environments. This would be the appropriate long term approach in the downstream business.

Regards,
Jo Blow

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